UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION

                           Washington, D.C. 20549

                                  FORM 10-Q

            (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                                     OR

            ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934


                For the quarterly period ended: June 30, 2005

                      Commission file number: 001-15985


                           UNION BANKSHARES, INC.


                         VERMONT          03-0283552

                                P.O. BOX 667
                                 MAIN STREET
                            MORRISVILLE, VT 05661

                Registrant's telephone number:  802-888-6600

Former name, former address and former fiscal year, if changed since last
report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes    X    No
                                                    -----      -----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes         No    X
                                                 -----      -----

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of July 31, 2005:
      Common Stock, $2 par value          4,554,663 shares


<PAGE>  1


                           UNION BANKSHARES, INC.
                              TABLE OF CONTENTS


PART l      FINANCIAL INFORMATION


Item 1.  Financial Statements

Unaudited Consolidated Financial Statements
  Union Bankshares, Inc. and Subsidiary
    Consolidated Balance Sheets                                           3
    Consolidated Statements of Income                                     4
    Consolidated Statement of Changes in Stockholders' Equity             5
    Consolidated Statements of Cash Flows                                 6
Notes to Unaudited Consolidated Financial Statements                      8

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                       10
Item 3.  Quantitative and Qualitative Disclosures About Market Risk      32
Item 4.  Controls and Procedures                                         32

PART II     OTHER INFORMATION

      Item 1.  Legal Proceedings                                         32
      Item 4.  Submission of Matters to Vote of Security Holders
      Item 6.  Exhibits                                                  32

Signatures                                                               33


<PAGE>  2


Part l Financial Information


Item 1.  Financial Statements

Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands)

<TABLE>
<CAPTION>

                                                              June 30,    December 31,
                                                                2005          2004
                                                                ----          ----


                                                           <c>           <c>
Assets

  Cash and due from banks                                     $ 15,995      $ 16,930
  Federal funds sold and overnight deposits                      3,948         4,187
                                                              --------      --------
    Cash and cash equivalents                                   19,943        21,117
  Interest bearing deposits in banks                             6,215         7,509
  Investment securities available-for-sale                      31,712        40,966
  Loans held for sale                                            6,457         8,814
  Loans                                                        285,882       271,421
  Allowance for loan losses                                     (3,022)       (3,067)
  Unearned net loan fees                                          (156)         (166)
                                                              --------      --------
      Net loans                                                282,704       268,188
                                                              --------      --------
  Accrued interest receivable                                    1,646         1,528
  Premises and equipment, net                                    5,379         5,121
  Other assets                                                   7,263         6,286
                                                              --------      --------

    Total assets                                              $361,319      $359,529
                                                              ========      ========

Liabilities and Stockholders' Equity

Liabilities
  Deposits
    Non-interest bearing                                      $ 45,943      $ 57,221
    Interest bearing                                           256,739       249,377
                                                              --------      --------
      Total deposits                                           302,682       306,598
  Borrowed funds                                                13,803         7,934
  Accrued interest and other liabilities                         3,780         2,594
                                                              --------      --------
      Total liabilities                                        320,265       317,126
                                                              --------      --------

Commitments and Contingencies

Stockholders' Equity
  Common stock, $2.00 par value; 5,000,000 shares authorized;
   4,915,611 shares issued at 6/30/05 and 12/31/04               9,831         9,831
  Paid-in capital                                                  107           107
  Retained earnings                                             32,629        33,810
  Treasury stock at cost; 360,948 shares at 6/30/05 and
   12/31/04                                                     (1,722)       (1,722)
  Accumulated other comprehensive income                           209           377
                                                              --------      --------
      Total stockholders' equity                                41,054        42,403
                                                              --------      --------

      Total liabilities and stockholders' equity              $361,319      $359,529
                                                              ========      ========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements


<PAGE>  3


Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands except Per Share Data)

<TABLE>
<CAPTION>

                                                             Three Months Ended         Six Months Ended
                                                                  June 30,                  June 30,
                                                              2005         2004         2005         2004
                                                              ----         ----         ----         ----


                                                        <c>          <c>          <c>          <c>
Interest income
  Interest and fees on loans                               $   4,913    $   4,341    $   9,552    $   8,650
  Interest on debt securities
    Taxable                                                      296          432          645          866
    Tax exempt                                                    47           54          100          107
  Dividends                                                       21           15           40           32
  Interest on federal funds sold and overnight deposits           24            7           37           12
  Interest on interest bearing deposits in banks                  55           53          114          102
                                                           ---------    ---------    ---------    ---------
      Total interest income                                    5,356        4,902       10,488        9,769
                                                           ---------    ---------    ---------    ---------

Interest expense
  Interest on deposits                                           921          726        1,686        1,482
  Interest on borrowed funds                                     101           91          195          179
                                                           ---------    ---------    ---------    ---------
      Total interest expense                                   1,022          817        1,881        1,661
                                                           ---------    ---------    ---------    ---------

      Net interest income                                      4,334        4,085        8,607        8,108

Provision for loan losses                                          -            -            -            -
                                                           ---------    ---------    ---------    ---------

      Net interest income after provision for loan losses      4,334        4,085        8,607        8,108
                                                           ---------    ---------    ---------    ---------

Noninterest income
  Trust income                                                    64           47          129           91
  Service fees                                                   729          694        1,403        1,356
  Net gains on sales of investment securities                      1            -            1           25
  Net gains on sales of loans held for sale                       23           54          119          234
  Other income                                                    91           75          141          126
                                                           ---------    ---------    ---------    ---------
      Total noninterest income                                   908          870        1,793        1,832
                                                           ---------    ---------    ---------    ---------

Noninterest expenses:
  Salaries and wages                                           1,408        1,312        2,785        2,721
  Pension and employee benefits                                  520          529        1,035        1,126
  Occupancy expense, net                                         198          189          402          381
  Equipment expense                                              244          221          512          441
  Other expenses                                                 907          898        1,724        1,656
                                                           ---------    ---------    ---------    ---------
      Total noninterest expense                                3,277        3,149        6,458        6,325
                                                           ---------    ---------    ---------    ---------

  Income before provision for income taxes                     1,965        1,806        3,942        3,615

Provision for income taxes                                       532          501        1,114        1,036
                                                           ---------    ---------    ---------    ---------

  Net income                                               $   1,433    $   1,305    $   2,828    $   2,579
                                                           =========    =========    =========    =========

Earnings per common share                                  $    0.31    $    0.29    $    0.62    $    0.57
                                                           =========    =========    =========    =========

Weighted average number of common
 shares outstanding                                        4,554,663    4,550,726    4,554,663    4,550,520
                                                           =========    =========    =========    =========

Dividends per common share                                 $    0.24    $    0.22    $    0.88    $    0.44
                                                           =========    =========    =========    =========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements


<PAGE>  4


Union Bankshares, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(Dollars in Thousands)

<TABLE>
<CAPTION>

                                               Common Stock
                                            ------------------                                        Accumulated
                                             Shares,                                                     other            Total
                                             net of                Paid-in    Retained    Treasury   comprehensive    stockholders'
                                            Treasury     Amount    capital    earnings      stock    income (loss)        equity
                                            --------     ------    -------    --------    --------   -------------    -------------


                                         <c>          <c>         <c>       <c>        <c>            <c>             <c>
Balance, December 31, 2004                  4,554,663    $9,831      $107      $33,810    $(1,722)       $377            $42,403

Comprehensive income:
  Net income                                        -         -         -        2,828          -           -              2,828
  Change in net unrealized gain (loss) on
   investment securities available-for-sale,
   net of reclassification adjustment and
   tax effects                                      -         -         -            -          -        (168)              (168)
                                                                                                                         -------

  Total comprehensive income                                                                                               2,660
                                                                                                                         -------

Cash dividends declared
 ($0.88 per share)                                  -         -         -       (4,009)         -           -             (4,009)
                                            ------------------------------------------------------------------------------------

Balance June 30, 2005                       4,554,663    $9,831      $107      $32,629    $(1,722)       $209            $41,054
                                            ====================================================================================
</TABLE>

See accompanying notes to the unaudited consolidated financial statements


<PAGE>  5


Union Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)

<TABLE>
<CAPTION>

                                                            Six Months Ended
                                                          --------------------
(Dollars in Thousands)                                    June 30,    June 30,
                                                            2005        2004
                                                            ----        ----


                                                       <c>         <c>
Cash Flows From Operating Activities
  Net Income                                              $  2,828    $  2,579
  Adjustments to reconcile net income to net cash
   provided by operating activities
    Depreciation                                               379         327
    Provision (credit) for deferred income taxes                14         (12)
    Net amortization on investment securities                   72         115
    Equity in losses of limited partnerships                    95          62
    Write-downs of impaired assets                               -          42
    (Decrease) increase in unamortized loan fees               (10)          8
    Proceeds from sales of loans held for sale               9,856      13,395
    Originals of loans held for sale                        (7,380)     (7,158)
    Net gain on sales of investment securities                  (1)        (25)
    Net gain on sales of loans held for sale                  (119)       (234)
    Net gain on disposals of premises and equipment             (1)         (5)
    (Increase) decrease in accrued interest receivable        (118)        118
    Decrease in other assets                                   140         253
    Decrease in income taxes                                  (174)        (47)
    Decrease in accrued interest payable                        (1)       (136)
    Increase in other liabilities                              613         289
                                                          --------    --------
      Net cash provided by operating activities              6,193       9,571
                                                          --------    --------

Cash Flows From Investing Activities
  Interest bearing deposits in banks
    Maturities and redemptions                               1,392       1,785
    Purchases                                                  (98)     (1,779)
  Investment securities available-for-sale
    Sales                                                    1,994         529
    Maturities, calls and paydowns                           7,932       6,397
    Purchases                                                 (999)     (9,829)
  Increase in loans, net                                   (14,793)       (788)
  Recoveries of loans charged off                               31          33
  Purchases of premises and equipment                         (637)       (815)
  Investments in limited partnerships                         (142)          -


<PAGE>  6


<CAPTION>

                                                          June 30,    June 30,
                                                            2005        2004
                                                            ----        ----


                                                       <c>         <c>
  Proceeds from sales of premises and equipment                  1          12
  Proceeds from sales of repossessed property                    8           -
                                                          --------    --------

      Net cash used in investing activities                 (5,311)     (4,455)
                                                          --------    --------

Cash Flows From Financing Activities
  Increase in borrowings outstanding, net                    5,869       5,813
  Proceeds from exercise of stock options                        -           9
  Net decrease in non-interest bearing deposits            (11,278)       (514)
  Net increase (decrease) in interest bearing deposits       7,362     (17,877)
  Dividends paid                                            (4,009)     (2,002)
                                                          --------    --------

      Net cash used in financing activities                 (2,056)    (14,571)
                                                          --------    --------

      Change in cash and cash equivalents                 $ (1,174)   $ (9,455)

Cash and cash equivalents
  Beginning                                               $ 21,117    $ 24,540
                                                          --------    --------

  Ending                                                  $ 19,943    $ 15,085
                                                          ========    ========

Supplemental Disclosures of Cash Flow Information:
  Interest paid                                           $  1,882    $  1,796
                                                          ========    ========

  Income taxes paid                                       $    555    $  1,095
                                                          ========    ========

Supplemental Schedule of Noncash Investing and
 Financing Activities:

  Other real estate acquired in settlement of loans       $    244    $    200
                                                          ========    ========

  Repossessed property acquired in settlement of loans    $     12    $      -
                                                          ========    ========

  Investment in limited partnerships acquired by
   capital contributions payable                          $   (748)   $      -
                                                          ========    ========

  Total change in net unrealized gain on investment
   securities available-for-sale                          $   (255)   $   (889)
                                                          ========    ========
</TABLE>

See accompanying notes to the unaudited consolidated financial statements


<PAGE>  7


                           UNION BANKSHARES, INC.
            NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:

Note 1.  Basis of Presentation
The accompanying interim unaudited consolidated financial statements of
Union Bankshares, Inc. (the Company) for the interim periods ended June 30,
2005 and 2004 and for the quarters then ended have been prepared in
conformity with U.S. generally accepted accounting principles (GAAP),
general practices within the banking industry and the accounting policies
described in the Company's Annual Report to Shareholders and Annual Report
on Form 10-K for the year ended December 31, 2004. In the opinion of the
Company's management, all adjustments (consisting only of normal recurring
adjustments) and disclosures necessary for a fair presentation of the
information contained herein have been made. This information should be
read in conjunction with the Company's 2004 Annual Report to Shareholders,
2004 Annual Report on Form 10-K, and current reports on Form 8-K. The
results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full fiscal
year ended December 31, 2005, or any other interim period.

Certain amounts in the 2004 consolidated financial statements have been
reclassified to conform to the 2005 presentation.

Note 2.  Commitments and Contingencies
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management after consulting with the
Company's Legal Counsel, any liability resulting from such proceedings
would not have a material adverse effect on the Company's financial
condition or results of operations.

Note 3.  Per Share Information
Earnings per common share amounts are computed based on the weighted
average number of shares of common stock outstanding during the period and
reduced for shares held in treasury. The assumed conversion of available
stock options does not result in material dilution. On January 14, 2005,
the Company declared a special one-time cash dividend of $0.40 per share in
addition to the regular quarterly cash dividend of $0.24 per share to
shareholders of record on January 24, 2005. These cash dividends
aggregating approximately $2.9 million were funded by available cash
resources.

Note 4.  New Accounting Pronouncements
On June 1, 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting
Changes and Error Corrections, a replacement of Accounting Principals Board
(APB) Opinion No. 20 and FASB Statement No. 3. The Statement applies to all
voluntary changes in accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting principle. SFAS No.
154 requires retrospective application to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable to determine either the period-specific effects or the
cumulative effects of the change. APB Opinion No. 20 previously required
that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. SFAS No. 154 improves
financial reporting because its requirements enhance the consistency of
financial information between periods. SFAS No. 154 is effective for fiscal
years beginning after December 15, 2005, with early adoption permitted. The
Company has adopted SFAS No. 154, which has had no impact on the Company's
financial position or results of operations.

On March 29, 2005, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin (SAB) No. 107 - SFAS No. 123R, Share-Based
Payment and certain SEC rules and regulations. SAB No. 107 provides
guidance from the SEC staff related to share-based payment transactions
with nonemployees, the transition from nonpublic to public entity status,
valuation methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial instruments
issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of
SFAS 123R in an interim period, capitalization of compensation cost related
to share-based payment arrangements, the


<PAGE>  8


accounting for income tax effects of share-based payment arrangements
upon adoption of SFAS 123R, the modification of employee share options
prior to adoption of SFAS 123R and disclosures in Management's Discussion
and Analysis ("MD&A") subsequent to adoption of SFAS 123R. SFAS 123R issued
in December 2004 is effective beginning January 1, 2006, and will require
the Company to expense share-based payments under the "modified
prospective" method. Under this method, compensation expense is recognized
at the time of the grant for all share-based payments granted after January
1, 2006, and also for all awards granted prior to January 1, 2006, that
remain unvested on the effective date. The Company has no unvested share-
based payments as of June 30, 2005. As of such date, the Company had not
adopted the transitional provisions of SFAS No. 123 but had continued to
account for its stock option plan in accordance with the provisions of APB
pinion No. 25. The Company does not expect that the adoption of SFAS No.
123R will have a significant impact on its results of operations or
inancial position but management is still in the process of analyzing the
future cost of stock options under the revised statement and the required
disclosure requirements of SAB 107.

Note 5.  Stock Option Plan
The Company has a stock option plan and continues to apply the intrinsic
value based method of accounting in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
stock options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had
compensation costs been determined on the basis of fair value pursuant to
FASB Statement No. 123, "Accounting for Stock-Based Compensation", the
effects on net income and earnings per common share for the three and six
months ended June 30, 2005 and 2004, would have approximated:

<TABLE>
<CAPTION>

                                                        Three Months Ended         Six Months Ended
                                                      ----------------------    ----------------------
                                                         2005        2004          2005        2004
                                                         ----        ----          ----        ----
                                                      (dollars in thousands)    (dollars in thousands)


                                                     <c>         <c>           <c>         <c>
Net income as reported                                  $1,433      $1,305        $2,828      $2,579
Deduct: Total stock-based compensation
 expense determined under fair value based
 method for all awards, net of related tax effects           0          (5)            0          (9)
                                                        ------      ------        ------      ------
Pro forma net income                                    $1,433      $1,300        $2,828      $2,570
                                                        ======      ======        ======      ======

Earnings per common share:
As reported                                             $ 0.31      $ 0.29        $ 0.62      $ 0.57
Pro forma                                               $ 0.31      $ 0.29        $ 0.62      $ 0.57
</TABLE>

Note 6.  Defined Benefit Pension Plan
Union Bank (Union), the Company's bank subsidiary sponsors a non-
contributory defined benefit pension plan covering all eligible employees.
The plan provides defined benefits based on years of service and final
average salary.

Net periodic pension benefit cost for the three and six months ended June
30, 2005 and 2004, consisted of the following components:

<TABLE>
<CAPTION>

                                                 Three Months Ended    Six Months Ended
                                                 ------------------    ----------------
                                                   2005      2004      2005     2004
                                                   ----      ----      ----     ----
                                                         (dollars in thousands)


                                                <c>       <c>        <c>       <c>
Service cost                                       $116      $ 92       $232      $204
Interest cost on projected benefit obligation       121       112        242       218
Expected return on plan assets                     (107)      (93)      (214)     (181)
Amortization of prior service cost                    2         1          4         3
Amortization of net loss                             15        19         30        41
                                                   ----      ----       ----      ----
Net periodic benefit cost                          $147      $131       $294      $285
                                                   ====      ====       ====      ====
</TABLE>


<PAGE>  9


Note 7.  Other Comprehensive Income
The components of other comprehensive income and related tax effects for
the three and six month periods ended June 30, 2005 and 2004 are as
follows:

<TABLE>
<CAPTION>

                                                                                     Three Months Ended    Six Months Ended
                                                                                          June 30,            June 30,
                                                                                      2005      2004        2005      2004
                                                                                      ----      ----        ----      ----
                                                                                              (dollars in thousands)


                                                                                   <c>     <c>          <c>       <c>
Unrealized holding gains (losses) on investment securities available-for-sale         $152    $(1,265)     $(254)    $(905)
Reclassification adjustment for gains realized in income                                (1)         -         (1)      (25)
Reclassification adjustment for losses recognized in income on impaired
 investment securities                                                                   -         41          -        41
                                                                                      ----    -------      -----     -----
Net unrealized gains (losses)                                                          151     (1,224)      (255)     (889)
Tax effect                                                                              51       (416)       (87)     (302)
                                                                                      ----    -------      -----     -----
Net of tax amount                                                                     $100    $  (808)     $(168)    $(587)
                                                                                      ====    =======      =====     =====
</TABLE>

Item 2.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations

       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                            RESULTS OF OPERATIONS

                                   GENERAL

The following discussion and analysis by management focuses on those
factors that had a material effect on Union Bankshares, Inc.'s (the
Company's) financial position as of June 30, 2005 and as of December 31,
2004, and its results of operations for the three and six months ended June
30, 2005 and 2004. This discussion is being presented to provide a
narrative explanation of the financial statements and should be read in
conjunction with the financial statements and related notes and with other
financial data appearing elsewhere in this filing. In the opinion of the
Company's management, the interim unaudited data reflects all adjustments,
consisting only of normal recurring adjustments, and disclosures necessary
to fairly present the Company's consolidated financial position and results
of operations for the interim period. Management is not aware of the
occurrence of any events after June 30, 2005, which would materially affect
the information presented.

             CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS

The Company may from time to time make written or oral statements that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may
include financial projections, statements of plans and objectives for
future operations, estimates of future economic performance and assumptions
relating thereto. The Company may include forward-looking statements in its
filings with the Securities and Exchange Commission, in its reports to
stockholders, including this Quarterly Report, in other written materials,
and in statements made by senior management to analysts, rating agencies,
institutional investors, representatives of the media and others.

Forward-looking statements reflect management's current expectations and
are subject to uncertainties, both general and specific, and risk exists
that those predictions, forecasts, projections and other estimates
contained in forward-looking statements will not be achieved. Also, when
any of the words "believes," "expects," "anticipates," "intends," "plans,"
"seeks," "estimates" or similar expressions, are used forward-looking
statements are being made. Many possible events or factors, including those
beyond the control of management, could affect the future financial results
and performance of the Company. This could cause results or performance to
differ materially from those expressed in forward-looking


<PAGE>  10


statements. The possible events or factors that might affect forward-looking
statements include, but are not limited to, the following:

*     uses of and changes in monetary, fiscal and tax policy by various
      governments
*     political, legislative or regulatory developments in Vermont, New
      Hampshire or the United States including changes in laws concerning
      accounting, taxes, banking and other aspects of the financial
      services industry
*     developments in general economic or business conditions nationally or
      in Vermont and northern New Hampshire, including interest rate
      fluctuations, market fluctuations and perceptions, job creation and
      unemployment rates, ability to attract new business, and inflation
      and their effect on the Company or its customers
*     changes in the competitive environment for financial services
      organizations, including increased competition from tax-advantaged
      credit unions
*     the Company's ability to retain key personnel
*     changes in technology including demands for greater automation which
      could present operational issues or significant capital outlays
*     acts or threats of terrorism or war and actions taken by the United
      States or other governments that might adversely affect business or
      economic conditions for the Company or its customers
*     adverse changes in the securities market which could adversely affect
      the value of the Company's stock
*     unanticipated lower revenues, loss of customers or business or higher
      operating expenses
*     the failure of assumptions underlying the establishment of the
      allowance for loan losses and estimations of values of collateral
      and various financial assets and liabilities
*     the amount that we invest in new business opportunities and the
      timing of these investments
*     the failure of actuarial, investment, work force, salary and other
      assumptions underlying the establishment of the reserve for future
      pension costs
*     future cash requirements might be higher than anticipated due to loan
      commitments or unused lines of credit being drawn upon or depositors
      withdrawing their funds
*     assumptions made regarding interest rate movement and sensitivity
      could vary substantially if actual experience differs from historical
      experience which could adversely affect the Company's results of
      operations
*     the creditworthiness of current loan customers is different from our
      understanding or changes dramatically and therefore the allowance for
      loan losses becomes inadequate

When evaluating forward-looking statements to make decisions with respect
to the Company, investors and others are cautioned to consider these and
other risks and uncertainties and are reminded not to place undue reliance
on such statements. Forward-looking statements speak only as of the date
they are made and the Company undertakes no obligation to update them to
reflect new or changed information or events, except as may be required by
federal securities laws.

                        CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United
States of America in the preparation of the Company's financial statements.
Certain accounting policies involve significant judgments and assumptions
by management which have a material impact on the reported amount of
assets, liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities in the consolidated financial statements
and accompanying related notes. The SEC has defined a company's critical
accounting policies as the ones that are most important to the portrayal of
the company's financial condition and results of operations, and which
require the company to make its most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the Company has identified
the accounting policies and judgments most critical to the Company. The
judgments and assumptions used by management are based on historical
experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions made
by management, actual results could differ from these judgments and


<PAGE>  11


estimates that could have a material impact on the carrying values of
assets and liabilities and the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
the preparation of its consolidated financial statements. In estimating the
allowance for loan losses, management utilizes historical experience as
well as other factors including the effect of changes in the local real
estate market on collateral values, the effect on the loan portfolio of
current economic indicators and their probable impact on borrowers and
changes in delinquent, nonperforming or impaired loans. Changes in these
factors may cause management's estimate of the allowance for loan losses to
increase or decrease and result in adjustments to the Company's provision
for loan losses in future periods. The Company also has other key
accounting policies, which involve the use of estimates, judgments and
assumptions that are significant to understanding the results, including
the liability for the defined benefit pension plan, valuation of deferred
tax assets and analysis of potential impairment of investment securities.
For additional information see FINANCIAL CONDITION - Allowance for Loan
Losses below. Although management believes that its estimates, assumptions
and judgments are reasonable, they are based upon information presently
available. Actual results may differ significantly from these estimates
under different assumptions, judgments or conditions.

                                  OVERVIEW

The Company's net income for the quarter ended June 30, 2005 was $1.433
million, compared with net income of $1.305 million for the second quarter
of 2004 or a 9.8% increase between years. The company's net income for the
six months ended June 30, 2005, was $2.828 million, compared with net
income of $2.579 million for the same period in 2004, or a 9.7% increase
between years. A quarterly cash dividend of $0.24 per share was declared
and paid in April, 2005, in addition to a quarterly cash dividend of $0.24
per share and a special cash dividend of $0.40 per share declared and paid
in January, 2005. A special dividend was declared as the Company's primary
capital ratio on December 31, 2004, approached 12%, 2004 earnings were
better than anticipated, and the current tax treatment of dividends is
beneficial to shareholders. The Company remains well capitalized after
payment of the regular and special dividends.

The Company's total assets increased from $359 million at December 31,
2004, to $361 million at June 30, 2005. Loans and loans held for sale
increased a net $12.1 million, while investments decreased $9.3 million
reflecting the continuing high demand for loans. The increase in loans was
also funded by an increase in borrowings of $5.9 million.


<PAGE>  12


The following per share information and key ratios depict several
measurements of performance or financial condition for or at the quarters
and six months ending June 30, 2005 and 2004, respectively:

<TABLE>
<CAPTION>

                                                  Quarter Ended                     Year to Date
                                         ------------------------------    ------------------------------
                                         June 30, 2005    June 30, 2004    June 30, 2005    June 30, 2004
                                         -------------    -------------    -------------    -------------


                                         <c>              <c>              <c>              <c>
Return on average assets (ROA) (1)            1.61%            1.49%            1.60%            1.47%
Return on average equity (ROE) (1)           14.13%           12.78%           13.89%           12.62%
Net interest margin (1)(2)                    5.36%            5.15%            5.36%            5.16%
Efficiency ratio (3)                         62.53%           62.62%           62.10%           62.86%
Net interest spread (4)                       5.05%            4.90%            5.06%            4.92%
Loan to deposit ratio                        96.58%           92.79%           96.58%           92.79%
Net loan charge-offs to average loans         0.06%            0.00%            0.03%            0.00%
Allowance for loan losses to loans            1.10%            1.19%            1.10%            1.19%
Non-performing assets to total assets         1.52%            1.22%            1.52%            1.22%
Equity to assets                             11.36%           11.91%           11.36%           11.91%
Total capital to risk assets                 17.71%           18.39%           17.71%           18.39%
Book value per share                        $ 9.01           $ 9.00           $ 9.01           $ 9.00
Earnings per share                          $ 0.31           $ 0.29           $ 0.62           $ 0.57
Dividends paid per share                    $ 0.24           $ 0.22           $ 0.88           $ 0.44
Dividend payout ratio (5)                    77.42%           76.70%          141.94%           77.63%

--------------------

<FN>
<F1>  Annualized
<F2>  The ratio of tax equivalent net interest income to average earning
      assets.
<F3>  The ratio of noninterest expense to net interest income and noninterest
      income excluding securities gains and losses.
<F4>  The difference between the average rate earned on assets minus the
      average rate paid on liabilities.
<F5>  Cash dividend declared and paid per share divided by consolidated net
      income per share.
</FN>
</TABLE>

The prime interest rate has risen four times during 2005, by 25 basis
points each time, to stand at 6.25% as of June 30, 2005. This is the
highest the prime rate has been since September 17, 2001. The prime rate
during the first six months of 2004 was static at 4.00%. The rise in the
prime rate is partially responsible for the 20 basis point increase in the
Company's Net Interest Margin year over year, as variable rate loans have
reacted more fully and quickly than core deposit rates to these increases
in the prime rate.

                            RESULTS OF OPERATIONS

Net Interest Income. The largest component of the Company's operating
income is net interest income, which is the difference between interest and
dividend income received from interest-earning assets and the interest
expense paid on its interest-bearing liabilities. The Company's net
interest income increased by $249 thousand, or 6.1%, to $4.33 million for
the three months ended June 30, 2005, from $4.09 million for the three
months ended June 30, 2004. The net interest spread increased 15 basis
points to 5.05% for the three months ended June 30, 2005, from 4.90% for
the three months ended June 30, 2004 as interest rates paid on liabilities
and earned on assets moved upward in response to the increases in the prime
rate. The net interest margin for the second quarter of 2005 increased 21
basis points to 5.36% from the 2004 period at 5.15% reflecting a rising
rate environment. For the first six months of 2005 net interest income
increased $499 thousand, or 6.15%, to $8.61 million, from $8.11 million for
the year earlier period. The net interest spread increased 14 basis points,
or 2.8%, to 5.06% for the first six months of 2005 compared to 4.92% for
the first six months of 2004. The net interest margin increased 20 basis
points, or 3.9%, to 5.36% for the first six months of 2005 compared to
5.16% for the same period in 2004. A decrease in prime rate would not
necessarily be beneficial to Union in the near term, see "OTHER FINANCIAL
CONSIDERATIONS - Market Risk and Asset and Liability Management."


<PAGE>  13


Yields Earned and Rates Paid. The following table shows, for the periods
indicated, the total amount of income recorded from interest-earning
assets, and the related average yields, the interest expense associated
with interest-bearing liabilities, expressed in dollars and average rates,
and the relative net interest spread and net interest margin. All yield and
rate information is calculated on an annualized tax equivalent basis. Yield
and rate information for a period is average information for the period,
and is calculated by dividing the annualized income or expense item for the
period by the average balance of the appropriate balance sheet item during
the period. Net interest margin is annualized tax equivalent net interest
income divided by average interest-earning assets. Nonaccrual loans are
included in asset balances for the appropriate periods, but recognition of
interest on such loans is discontinued and any remaining accrued interest
receivable is reversed, in conformity with federal regulations. The yields,
net interest spread and net interest margins appearing in the following
table have been calculated on a pre-tax basis:

<TABLE>
<CAPTION>

                                                               Three months ended June 30,
                                                          2005                               2004
                                            -------------------------------    -------------------------------
                                                        Interest    Average                Interest    Average
                                            Average      Earned/     Yield/    Average      Earned/     Yield/
                                            Balance       Paid        Rate     Balance       Paid        Rate
                                            -------     --------    -------    -------     --------    -------
                                                                  (dollars in thousands)


                                         <c>          <c>         <c>       <c>          <c>         <c>
Average Assets
  Federal funds sold and
   overnight deposits                       $  3,329     $   24      2.79%     $  3,863     $    7      0.73%
  Interest bearing deposits in banks           6,545         55      3.33%        6,646         53      3.17%
  Investment securities (1), (2)              34,525        352      4.35%       43,580        494      4.75%
  Loans, net (1), (3)                        284,639      4,913      7.00%      268,685      4,341      6.56%
  FHLB of Boston stock                         1,241         12      3.90%        1,241          7      2.14%
                                            --------     ------      ----      --------     ------      ----
Total interest-earning assets (1)            330,279      5,356      6.60%      324,015      4,902      6.16%

Cash and due from banks                       12,760                             13,571
Premises and equipment                         5,378                              4,841
Other assets                                   7,605                              8,747
                                            --------                           --------
      Total assets                          $356,022                           $351,174
                                            ========                           ========

Average Liabilities and
  Stockholders' Equity:
  NOW accounts                              $ 50,604     $   63      0.50%     $ 44,833     $   44      0.40%
  Savings/money market accounts              109,342        294      1.08%      111,494        203      0.73%
  Time deposits                               96,431        564      2.35%       93,871        479      2.05%
  Borrowed funds                               8,842        101      4.52%       10,334         91      3.48%
                                            --------     ------      ----      --------     ------      ----
      Total interest-bearing liabilities     265,219      1,022      1.55%      260,532        817      1.26%

Non-interest bearing deposits                 46,296                             46,405
Other liabilities                              3,955                              3,376
                                            --------                           --------
      Total liabilities                      315,470                            310,313

Stockholders' equity                          40,552                             40,861
                                            --------                           --------
      Total liabilities and
       stockholders' equity                 $356,022                           $351,174
                                            ========                           ========

Net interest income                                      $4,334                             $4,085
                                                         ======                             ======

Net interest spread (1)                                              5.05%                              4.90%
                                                                     ====                               ====

Net interest margin (1)                                              5.36%                              5.15%
                                                                     ====                               ====

--------------------
<FN>
<F1>  Average yield reported on a tax-equivalent basis.
<F2>  Average balances of investment securities are calculated on the
      amortized cost basis.
<F3>  Includes loans held for sale and is net of unearned income and
      allowance for loan losses.
</FN>
</TABLE>


<PAGE>  14


<TABLE>
<CAPTION>

                                                                 Six months ended June 30,
                                                          2005                               2004
                                            -------------------------------    -------------------------------
                                                        Interest    Average                Interest    Average
                                            Average      Earned/     Yield/    Average      Earned/     Yield/
                                            Balance       Paid        Rate     Balance       Paid        Rate
                                            -------     --------    -------    -------     --------    -------
                                                                  (dollars in thousands)


                                         <c>          <c>         <c>       <c>          <c>         <c>
Average Assets:
  Federal funds sold and
   overnight deposits                       $  2,746     $    37     2.67%     $  3,372     $   12      0.74%
  Interest bearing deposits in banks           6,969         114     3.29%        6,581        102      3.10%
  Investment securities (1), (2)              37,020         762     4.37%       42,267        990      4.90%
  Loans, net (1), (3)                        280,549       9,552     6.93%      267,020      8,650      6.57%
  FHLB of Boston Stock                         1,241          23     3.71%        1,241         15      2.46%
                                            --------     -------     ----      --------     ------      ----
Total interest-earning assets (1)            328,525      10,488     6.51%      320,481      9,769      6.20%

Cash and due from banks                       13,186                             16,525
Premises and equipment                         5,297                              4,701
Other assets                                   7,461                              8,737
                                            --------                           --------
      Total assets                          $354,469                           $350,444
                                            ========                           ========

Average Liabilities and
  Stockholder's Equity:
  Now accounts                              $ 47,906     $   114     0.48%     $ 44,188     $   87      0.40%
  Savings/money market accounts              109,856         535     0.98%      111,359        413      0.75%
  Time deposits                               93,395       1,037     2.24%       94,606        982      2.09%
  Borrowed funds                               8,991         195     4.32%        9,896        179      3.57%
                                            --------     -------     ----      --------     ------      ----
      Total interest-bearing liabilities     260,148       1,881     1.45%      260,049      1,661      1.28%

Non-interest bearing deposits                 50,050                             46,286
Other liabilities                              3,558                              3,236
                                            --------                           --------
      Total liabilities                      313,756                            309,571

Stockholder's equity                          40,713                             40,873
                                            --------                           --------
      Total liabilities and
       stockholders' equity                 $354,469                           $350,444
                                            ========                           ========

Net interest income                                      $ 8,607                            $8,108
                                                         =======                            ======

Net interest spread (1)                                              5.06%                              4.92%
                                                                     ====                               ====

Net interest margin (1)                                              5.36%                              5.16%
                                                                     ====                               ====

<FN>
<F1>  Average yield reported on a tax-equivalent basis.
<F2>  The average balance of investment securities is calculated on the
      amortized cost basis.
<F3>  Includes loans held for sale and is net of unearned income and
      allowance for loan losses.
</FN>
</TABLE>

Rate/Volume Analysis. The following tables describe the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest
income and interest expense during the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to:

*     changes in volume (change in volume multiplied by prior rate);
*     changes in rate (change in rate multiplied by current volume); and
*     total change in rate and volume.

Changes attributable to both rate and volume including the extra day in
2004 due to leap year have been allocated proportionately to the change due
to volume and the change due to rate.


<PAGE>  15


<TABLE>
<CAPTION>

                                               Three Months Ended June 30, 2005 Compared
                                                  to Three Months Ended June 30, 2004
                                                  Increase/(Decrease) Due to Change In
                                               -----------------------------------------
                                                        Volume    Rate    Net
                                                        ------    ----    ---
                                                        (dollars in thousands)


                                                     <c>       <c>     <c>
Interest-earning assets:
  Federal funds sold and overnight deposits             $ (2)     $ 19    $ 17
  Interest bearing deposits in banks                      (1)        3       2
  Investment securities                                 (102)      (40)   (142)
  Loans, net                                             269       303     572
  FHLB of Boston stock                                     -         5       5
                                                        ----      ----    ----
      Total interest-earning assets                      164       290     454

Interest-bearing liabilities:
  NOW accounts                                             7        12      19
  Savings/money market accounts                           (5)       96      91
  Time deposits                                           15        70      85
  Borrowed funds                                         (15)       25      10
                                                        ----      ----    ----
      Total interest-bearing liabilities                   2       203     205
                                                        ----      ----    ----
Net change in net interest income                       $162      $ 87    $249
                                                        ====      ====    ====

<CAPTION>

                                               Six Months Ended June 30, 2005 Compared
                                                  to Six Months Ended June 30, 2004
                                                Increase/(Decrease) Due to Change In
                                               ---------------------------------------
                                                      Volume    Rate    Net
                                                      ------    ----    ---
                                                      (dollars in thousands)


                                                   <c>       <c>     <c>
Interest-earning assets:
  Federal funds sold and overnight deposits           $ (5)     $ 30    $ 25
  Interest bearing deposits in banks                     6         6      12
  Investment securities                               (123)     (105)   (228)
  Loans, net                                           434       468     902
  FHLB of Boston stock                                   -         8       8
                                                      ----      ----    ----
      Total interest-earning assets                    312       407     719

Interest-bearing liabilities:
  NOW accounts                                           8        19      27
  Savings/money market accounts                         (6)      128     122
  Time deposits                                        (14)       69      55
  Borrowed funds                                       (17)      (33)     16
                                                      ----      ----    ----
      Total interest-bearing liabilities               (29)      249     220
                                                      ----      ----    ----
Net change in net interest income                     $341      $158    $499
                                                      ====      ====    ====
</TABLE>

Quarter Ended June 30, 2005 compared to Quarter Ended June 30, 2004.

Interest and Dividend Income. The Company's interest and dividend income
increased $454 thousand, or 9.3%, to $5.36 million for the three months
ended June 30, 2005, from $4.90 million for the three months ended June 30,
2004, with average earning assets increasing $6.3 million, or 1.9%, to
$330.3 million for the three months ended June 30, 2005, from $324.0
million for the three months ended June 30, 2004. The increase in interest
income resulting from the rise in average earning assets was augmented by
the higher rates earned on the majority of these assets in 2005 versus
2004. Average loans approximated $284.6 million at an average yield of
7.00% for the three months ended June 30, 2005 up from $268.7 million at an
average yield of 6.56% for the three months ended June 30, 2004 or a 5.9%
increase in volume and a 44 basis point increase in yield. The strongest
growth between the two years was in the commercial real estate market where
new loan volume was strong due to relatively low long-


<PAGE>  16


term market interest rates , positive local economic trends and
opportunities brought about by further consolidation in the banking industry.
Quarterly average loans secured by real estate increased $12.7 million,
or 5.7%, to $236.9 million for the second quarter of 2005, from $224.2
million for the second quarter of 2004. This increase was the result of
strong demand for residential and commercial real estate in the Company's
market. This demand was influenced in part by low long-term interest rates,
and high demand and prices in the Chittenden County, Vermont, market which
is contiguous to the Company's and is fueling growth in the Company's
market. Municipal loans increased $4.7 million, or 29.0%, to an average of
$20.9 million in 2005 from an average of $16.2 million in 2004. Average
commercial loans decreased slightly year to year, decreasing $466 thousand,
r 2.1%, to $21.5 million for 2005 compared to $22.0 million for 2004.

The average balance of investments (including mortgage-backed securities)
decreased $9.1 million or 20.8% to $34.5 million for the three months ended
June 30, 2005, from $43.6 million for the three months ended June 30, 2004.
The decrease in the investment portfolio in 2005 reflects the continuing
growth in the loan portfolio. The average level of federal funds sold and
overnight deposits decreased $534 thousand or 13.8%, to $3.3 million for
the three months ended June 30, 2005, from $3.9 million for the three
months ended June 30, 2004. Interest income from non-loan instruments was
$443 thousand for the second quarter of 2005 and $561 thousand for the same
period of 2004, reflecting the decrease in yields in the investment
portfolio and the overall decrease in volume as the majority of paydowns
and matured, called or sold securities and interest bearing deposits in
banks were utilized to fund the loan demand.

Interest Expense. The Company's interest expense increased $ 205 thousand,
or 25.1%, to $1.0 million for the three months ended June 30, 2005, from
$817 thousand for the three months ended June 30, 2004 as rates paid on
funds started to move up while the volume of average interest-bearing
liabilities increased $4.7 million, or 1.8%, to $265.2 million for the
three months ended June 30, 2005, from $260.5 million for the three months
ended June 30, 2004. Average time deposits were $96.4 million for the three
months ended June 30, 2005, and $93.9 million for the three months ended
June 30, 2004, or an increase of 2.7%. It appears depositors are still
cautious about locking in for long-term certificates of deposit. The
average balances for money market and savings accounts decreased $2.2
million, or 1.9%, to $109.3 million for the three months ended June 30,
2005, from $111.4 million for the three months ended June 30, 2004. The
12.9% or $5.8 million increase in NOW accounts brought the average balance
up to $50.6 million from $44.8 million. During the first quarter of 2005,
the bank subsidiary introduced a new suite of deposit products and
ancillary benefits for its deposit account holders. During the second
quarter of 2005, as part of this product launch, some legacy account
products that did not pay interest were converted to new deposit products
that pay interest. The account conversions resulted in the transfer of
over $6.0 million from demand deposits to interest bearing checking account
products.

The average balance of funds borrowed has decreased from $10.3 million for
the three months ended June 30, 2004 to $8.8 million for the three months
ended June 30, 2005 while the average rate paid rose from 3.48% to 4.52%
between years.

Noninterest Income. The Company's noninterest income increased $38
thousand, or 4.4%, to $908 thousand for the three months ended June 30,
2005 from $870 thousand for the three months ended June 30, 2004. Trust
department income increased to $64 thousand for the three months of 2005
from $47 thousand in the same period of 2004 or a 36.2% increase, primarily
due to the increase in the overall level of the stock market since the
majority of the fee income is based on the market value of assets under
management. Gain on sale of loans decreased between years to $23 thousand
for the second quarter of 2005 from $54 thousand for the same period in
2004 due to Management's decision to lower the volume of loan sales ($3.2
million in 2005 versus $5.9 million in 2004) and the increasing costs of
selling in the secondary market. Service fees (sources of which include,
among others, deposit and loan servicing fees, ATM fees, and safe deposit
fees) rose 5.0% between years increasing $35 thousand to $729 thousand for
the three months ended June 30, 2005, from $694 thousand for the three
months ended June 30, 2004. The main components of other income in both
years are net servicing rights on loans sold and the increase in the cash
surrender value of life insurance owned.


<PAGE>  17


Noninterest Expense. The Company's noninterest expense increased $128
thousand, to $3.3 million for the three months ended June 30, 2005,
compared to $3.1 million for the three months ended June 30, 2004. Salaries
and wages increased $96 thousand, or 7.3% to 1.4 million for the three
months ended June 30, 2005, from $1.3 million for the three months ended
June 30, 2004. This increase is due primarily to normal salary growth, and
the addition of the St. Albans, Vermont, loan production office in the
fourth quarter of 2004. Pension and employee benefits decreased $9
thousand, or 1.7%, to $520 thousand for the three months ended June 30,
2005, from $529 thousand for the three months ended June 30, 2004. Health
insurance coverage provided to eligible employees is self-insured by the
Company up to certain individual and aggregate stop loss coverages and the
experience during the second quarter of 2005 has been favorable. Net
occupancy expense increased $9 thousand, or 4.8%, to $198 thousand for the
three months ended June 30, 2005, from $189 thousand for the three months
ended June 30, 2004, due mainly to the increased cost of fuel and utilities
and the opening of the St. Albans, Vermont loan center. Equipment expense
increased $23 thousand, or 10.4%, to $244 thousand for the three months
ended June 30, 2005, from $221 thousand for the same period in 2004,
reflecting the increased depreciation and maintenance contract expense on
new equipment. Other operating expenses were up $9 thousand, or 1.0%, to
$907 thousand for the months ended June 30, 2005 compared to $898 thousand
for the same period in 2004. They would have been up $33 thousand more (or
a total of 4.7%) except for the impact of Union purchasing Vermont State
Franchise Tax Credits at 60% of their value which the Company was able to
utilize during the second quarter of 2005.

Income Tax Expense. The Company's income tax expense increased by $31
thousand, or 6.2%, to $532 thousand for the three months ended June 30,
2005, from $501 thousand for the comparable period of 2004, mainly due to
increased net taxable income.

Year to Date June 30, 2005 compared to Year to Date June 30, 2004.

Interest and Dividend Income. The Company's interest and dividend income
increased $719 thousand, or 7.4%, to $10.5 million for the first six months
of 2005, from $9.8 million for the first six months of 2004. This increase
was due primarily to a $902 thousand, or 10.4%, increase in interest and
fees on loans, partially offset by a $228 thousand decrease in interest and
dividend income from investment securities available-for-sale. The increase
in loan related income is due to increases in loan portfolio balances from
$267.0 million on average in 2004 to $280.5 million in 2005. The increases
in loan rates resulted from increases in the prime lending rate over the
last year. The decrease in investment income was due primarily to
decreasing balances in the investment categories from $42.3 million in 2004
on average to $37.0 million on average in 2005 as cash flows from
investments have been utilized to fund the growth in the loan portfolio.

Interest expense. The Company's interest expense increased $220 thousand,
or 13.2%, to $1.9 million for the first six months of 2005, from $1.7
million for the first six months of 2004. This increase was due primarily
to increases in interest rates paid on deposits, which increased 16 basis
points, or 13.6%, to 1.34% from 1.18%. The year-to-date average interest
bearing deposit balances were essentially flat at $251.2 million for 2005,
compared to $250.2 million for 2004. Interest expense on borrowed funds
increased $16 thousand, or 8.9%, which reflects the increase in the average
rate on borrowings to 4.32% for the first six months of 2005 compared to
3.57% for the same period in 2004, while year-to-date average balances
decreased $905 thousand from $9.9 million in 2004 to $9.0 million in
2005.

Noninterest income: The Company's noninterest income decreased $39
thousand, or 2.2%, from $1.83 million for the first six months of 2004 to
$1.79 million for the first six months of 2005. This decrease was due
primarily to the decrease in net gains on sales of loans held for sale,
from $234 thousand in 2004 to $119 thousand in 2005 as interest rates have
improved in 2005 and Union's management decided to retain higher rate loans
instead of selling them to the secondary market. Union sold $9.7 million in
residential real estate loans during the first half of 2005 versus $13.2
million during the same period in 2004. This decrease was partially offset
by increases in trust income and servicing fees. Trust income increased $38
thousand, to $129 thousand from $91 thousand, or 41.8%, which was due
primarily to the increase in fees charged and the increase in the overall
level of the stock market since the majority of trust fee income is based
on the market value of assets under management. Servicing fees (sources of
which include, among others, deposit and loan servicing fees, ATM fees, and
safe deposit fees) increased $47 thousand,


<PAGE>  18


to $1.40 million from $1.36 million, or 3.5%.

Noninterest expense: The Company's noninterest expense increased $133
thousand, or 2.1%, to $6.46 million for the first six months of 2005 from
$6.33 million for the first six months of 2004. Salaries and wages
increased $64 thousand or 2.4% to $2.79 million from $2.72 million with the
increase primarily due to normal salary increases and the addition of the
St. Albans loan production office. Pension and employee benefits decreased
$91 thousand, or 8.1%, to $1.04 million from $1.13 million due primarily to
a decrease in health insurance expense between years. Health insurance
coverage provided to eligible employees is self-insured by the Company up
to certain individual and aggregate stop loss coverages and the experience
during the first six months of 2005 has been favorable. In addition pension
plan expenses decreased $22 thousand, or 7.1%, from $312 thousand to $290
thousand, due primarily to increases in the projected earnings on the
assets in the pension plan due to increases in interest rates. Net
occupancy expenses increased $21 thousand, or 5.5%, to $402 thousand from
$381 thousand, due primarily to increases in costs of fuel and utilities,
and the opening of the St. Albans, Vermont, loan center. Equipment expenses
increased $71 thousand, or 16.1%, to $512 thousand from $441 thousand,
reflecting the increased depreciation and maintenance contract expense on
new equipment, primarily an imaging reader sorter, ATM's, cars, generator,
computer hardware and software, and upgraded telephone systems. Other
operating expenses were up $68 thousand, or 4.1%, to $1.72 million from
$1.66 million, as the Company continues its compliance efforts related to \
Sarbanes-Oxley Section 404 implementation. And, Union introduced a new
suite of deposit products and ancillary benefits for deposit account
holders, beginning in March 2005. Also, the change during the second
quarter of 2004 from paying for correspondent service charges by leaving
deposits on balance to paying hard dollars increased year to date expense
by $30 thousand. Other operating expenses would have been up $33 thousand
more (or a total of 6.1%) except for the impact of Union purchasing Vermont
State Franchise Tax Credits at 60% of their value which the Company was
able to utilize during the second quarter of 2005.

Income Tax Expense: The Company's income tax expense increased $78
thousand, or 7.5%, to $1.11 million for the first six months of 2005
compared to $1.04 million for the same period in 2004. This increase was
mainly due to increased net taxable income.

                             FINANCIAL CONDITION

At June 30, 2005, the Company had total consolidated assets of $361.3
million, including net loans and loans held for sale of $289.2 million,
deposits of $302.7 million and stockholders' equity of $41.1 million. The
Company's total assets increased $ 1.8 million or 0.5% to $ 361.3 million
at June 30, 2005, from $359.5 million at December 31, 2004, which is due to
the increase in net loans and loans held for sale of $12.2 million, or
4.4%, the continuing management strategy of managing balance sheet growth
by the sale of loans totaling $9.7 million during the first six months of
2005, the management strategy of utilizing cash flows from securities
available for sale to fund growth in the loan portfolio, and the effect of
the $1.8 million special dividend paid to shareholders. June thirtieth of
each year is our normal seasonal low point in terms of total assets, loans
and deposits due to the majority of the municipalities having to be out of
debt at least one day each fiscal year. Total net loans and loans held for
sale increased $12.2 million or 4.4% to $289.2 million or 80.0% of total
assets at June 30, 2005, as compared to $277.0 million or 77.0% of total
assets at December 31, 2004. Cash and cash equivalents, including federal
funds sold and overnight deposits, decreased $1.2 million or 5.6% to $19.9
million at June 30, 2005, from $21.1 million at December 31, 2004.

Investment securities available-for-sale decreased from $41.0 million at
December 31, 2004 to $31.7 million at June 30, 2005, a $9.3 million or
22.6% decrease. Securities maturing have not been replaced dollar for
dollar in order to fund loan demand and management's decision to currently
hold in portfolio a portion of loans held-for-sale.

Deposits decreased $3.9 million or 1.3% to $302.7 million at June 30, 2005,
from $306.6 million at December 31, 2004 which is partially a seasonal
fluctuation (See average balances in the Yields Earned and Rates Paid tables
on Pages 14 and 15) and partially a result of the ever increasing competition
for deposit


<PAGE>  19


dollars as both credit unions and brokers/financial advisors
aggressively seek those same dollars. Total borrowings increased $5.9
million to $13.8 million at June 30, 2005, from $7.9 million at December
31, 2004, as Union Bank ("Union") took down four amortizing advances to
match fund four larger commercial real estate loans originated.

Total capital decreased from $42.4 million at December 31, 2004 to $41.1
million at June 30, 2005 reflecting net income of $2.83 million for the
first six months of 2005, less the regular and special dividends paid
totaling approximately $4.0 million. (see Capital Resources section on Page
30)

Loans Held for Sale and Loan Portfolios. The Company's loans held for sale
and loan portfolios primarily consists of adjustable-rate and fixed-rate
mortgage loans secured by one-to-four family, multi-family residential or
commercial real estate. As of June 30, 2005, the Company's gross loan
portfolio totaled $292.3 million, or 80.9%, of assets, up from $280.2 million
or 77.9% of assets as of December 31, 2004 and from $266.3 million or 77.4%
as of June 30, 2004. Gross loans and loans held for sale have increased $12.1
million or 4.3% since December 31, 2004. The Company sold $3.2 million of
loans held for sale during the second quarter of 2005 resulting in a gain on
sale of loans of $23 thousand.

The following table shows information on the composition of the Company's
gross loans held for sale and loan portfolio as of June 30, 2005 and
December 31, 2004:

<TABLE>
<CAPTION>

Loan Type                                         June 30, 2005       December 31, 2004
---------                                       -----------------     -----------------
                                                         (dollars in thousands)


                                             <c>         <c>       <c>         <c>
Residential real estate                         $108,192     37.0%    $106,526     38.0%
Construction real estate                          19,912      6.8%      20,050      7.2%
Commercial real estate                           112,632     38.5%     111,497     39.8%
Commercial                                        27,371      9.4%      19,979      7.1%
Consumer                                           8,253      2.8%       8,729      3.1%
Municipal loans                                   15,979      5.5%      13,454      4.8%
                                                --------    -----     --------    -----
      Total loans                                292,339    100.0%     280,235    100.0%

Deduct:
Allowance for loan losses                         (3,022)               (3,067)
Net deferred loan fees, premiums & discounts        (156)                 (166)
                                                --------              --------
                                                $289,161              $277,002
                                                ========              ========
</TABLE>

The Company originates and sells residential mortgages into the secondary
market, with most such sales made to the Federal Home Loan Mortgage
Corporation (FHLMC) and the Vermont Housing Finance Agency (VHFA).
Management expects to continue to use this strategy in an effort to protect
the interest margin from the effect of making long-term loans in the low
long-term interest rate environment which has continued throughout the
second quarter of 2005 despite the increases in the prime rate. The Company
services an $183.4 million residential real estate mortgage portfolio,
approximately $79.8 million of which is serviced for unaffiliated third
parties at June 30, 2005. Additionally, the Company originates commercial
real estate and commercial loans under various SBA programs that provide an
agency guarantee for a portion of the loan amount. The Company occasionally
sells the guaranteed portion of the loan to other financial concerns and
will retain servicing rights, which generates fee income. The Company
serviced $5.3 million of commercial and commercial real estate loans for
unaffiliated third parties as of June 30, 2005. The Company capitalizes
servicing rights on these sales and recognizes gains and losses on the sale
of the principal portion of these loans as they occur. The unamortized
balance of servicing rights on loans sold with servicing retained was $328
thousand at June 30, 2005, with an estimated market value in excess of
their carrying value.

In the ordinary course of business, the Company occasionally participates
out a portion of commercial/commercial real estate loans to other financial
institutions for liquidity or credit concentration management purposes. The
total of loans participated out as of June 30, 2005, was $7.0 million.


<PAGE>  20


Asset Quality. The Company, like all financial institutions, is exposed to
certain credit risks including those related to the value of the collateral
that secures its loans and the ability of borrowers to repay their loans.
Management closely monitors the Company's loan and investment portfolios
and other real estate owned for potential problems on a periodic basis and
reports to the Company's and the subsidiary's Boards of Directors at
regularly scheduled meetings.

The Company's loan review procedures include a credit quality assurance
process that begins with approval of lending policies and underwriting
guidelines by the Board of Directors, a loan review department supervised
by an experienced former regulatory examiner, low individual lending limits
for officers, Board approval for large credit relationships and a quality
control process for loan documentation that includes post-closing reviews.
The Company also maintains a monitoring process for credit extensions. The
Company performs periodic concentration analyses based on various factors
such as industries, collateral types, large credit sizes and officer
portfolio loads. The Company has established underwriting guidelines to be
followed by its officers. The Company monitors its delinquency levels for
any negative or adverse trends. The Company continues to invest in its loan
portfolio monitoring system to enhance its risk management capabilities.
There can be no assurance, however, the Company's loan portfolio will not
become subject to increasing pressures from deteriorating borrower credit
due to general or local economic conditions.

By definition restructured loans may include troubled debt restructurings
that involved forgiving a portion of interest or principal on a loan,
refinancing loans at a rate materially less than the market rate,
rescheduling loan payments, or granting other concessions to a borrower due
to financial or economic reasons related to the debtor's financial
difficulties that the Company would not otherwise consider. Restructured
loans do not include qualifying restructured loans that have complied with
the terms of their restructure agreement for a satisfactory period of time.
The Company's restructured loans in compliance with modified terms totaled
$21 thousand at June 30, 2005 compared to $656 thousand at December 31,
2004. There are four restructured loans with principal balances totaling
$163 thousand that are not in compliance with the modified terms as of June
30, 2005. These four loans are in nonaccrual status. At December 31, 2004,
there were three restructured loans at a value of $159 thousand that were
not in compliance with the modified terms. The restructured loans at both
June 30, 2005 and December 31, 2005 were a result of rescheduling loan
payments. At June 30, 2005, the Company was not committed to lend any
additional funds to borrowers whose terms have been restructured.

Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Loans are designated as nonaccrual when reasonable
doubt exists as to the full collection of interest and principal. Normally,
when a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that cash is
received and where the future collection of interest and principal is
probable. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in
the judgment of management, the loans are estimated to be fully collectible
as to both principal and interest.

The Company had loans on nonaccrual status totaling $1.2 million or 0.41%
of gross loans at June 30, 2005, $1.2 million or 0.43% at December 31, 2004
and $1.7 million or 0.65% at June 30, 2004. The aggregate interest income
not recognized on such nonaccrual loans amounted to approximately $232
thousand and $418 thousand as of June 30, 2005 and 2004, respectively and
$338 thousand as of December 31, 2004.

The Company had $4.0 million and $4.1 million in loans past due 90 days or
more and still accruing at June 30, 2005 and December 31, 2004,
respectively. The balance in loans past due 90 days or more and still
accruing interest at both dates is primarily due to one commercial real
estate loan relationship that management is monitoring closely. The liquid
assets and real estate collateralizing this loan relationship are
sufficient in management's view to mitigate credit risk. At June 30, 2005
and December 31, 2004, respectively, the Company had internally classified
certain loans totaling $642 thousand and $1.6 million. In management's view,
such loans represent a higher degree of risk and could become nonperforming
loans in the future. While still on a performing status, in accordance with
the Company's credit policy,


<PAGE>  21


loans are internally classified when a review indicates any of the
following conditions makes the likelihood of collection uncertain:

*     the financial condition of the borrower is unsatisfactory;
*     repayment terms have not been met;
*     the borrower has sustained losses that are sizable, either in
      absolute terms or relative to net worth;
*     confidence is diminished;
*     loan covenants have been violated;
*     collateral is inadequate; or
*     other unfavorable factors are present.

At June 30, 2005, the Company held real estate acquired by foreclosure or
through repossession worth $279 thousand, which consisted of one property
with open land as well as residential and commercial components, and a
second residential real estate property. At December 31, 2004, the Company
held one real estate property acquired by foreclosure worth $35 thousand.

Allowance for Loan Losses. Some of the Company's loan customers ultimately
do not make all of their contractually scheduled payments, requiring the
Company to charge off a portion or all of the remaining principal balance
due. The Company maintains an allowance for loan losses to absorb such
losses. The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio; however, actual loan losses may vary from current
estimates.

The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the composition of the
portfolio, growth of the portfolio, credit concentrations, trends in
historical loss experience, delinquency and past due trends, specific
impaired loans, and economic conditions. Allowances for impaired loans are
generally determined based on collateral values or the present value of
estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-offs, net of
recoveries on loans previously charged off. The provision for loan losses
represents the current period credit cost associated with maintaining an
appropriate allowance for loan losses. While the Company allocates the
allowance for loan losses based on the percentage category to total loans,
the portion of the allowance for loan losses allocated to each category
does not represent the total available for future losses which may occur
within the loan category since the total allowance for possible loan losses
is a valuation reserve applicable to the entire portfolio. Based on an
evaluation of the loan portfolio, management presents a quarterly analysis
of the allowance for loan losses to the Board of Directors, indicating any
changes in the allowance since the last review and any recommendations as
to adjustments in the allowance.

For the quarter ended June 30, 2005, the methodology used to determine the
provision for loan losses was unchanged from the prior year. The
composition of the Company's loan portfolio remained relatively unchanged
from December 31, 2004 and there was no material change in the lending
programs or terms during the quarter.


<PAGE>  22


The following table reflects activity in the allowance for loan losses for
the three months ended June 30, 2005 and 2004:

<TABLE>
<CAPTION>

                                  Three Months Ended, June 30,    Six Months Ended, June 30
                                  ----------------------------    -------------------------
                                        2005        2004               2005       2004
                                        ----        ----               ----       ----
                                                    (dollars in thousands)


                                    <c>         <c>                <c>        <c>
Balance at beginning of period         $3,068      $3,019             $3,067     $3,029
Charge-offs:
  Real Estate                              25           8                 28         34
  Commercial                               13           -                 13          -
  Consumer and other                       17           1                 35          5
                                       ------      ------             ------     ------
      Total charge-offs                    55           9                 76         39
                                       ------      ------             ------     ------
Recoveries:
  Real Estate                               -           -                 12          -
  Commercial                                1           2                  1          5
  Consumer and other                        8          11                 18         28
                                       ------      ------             ------     ------
      Total recoveries                      9          13                 31         33
                                       ------      ------             ------     ------
Net recoveries (charge-offs)              (46)          4                (45)        (6)
                                       ------      ------             ------     ------
Provision for loan losses                   -           -                  -          -
                                       ------      ------             ------     ------
Balance at end of period               $3,022      $3,023             $3,022     $3,023
                                       ======      ======             ======     ======
</TABLE>

The following table shows the breakdown of the Company's allowance for loan
losses by category of loan (net of loans held for sale) and the percentage
of loans in each category to total loans in the respective portfolios at
the dates indicated.

<TABLE>
<CAPTION>

                                    June 30,           December 31,
                                      2005                 2004
                               -----------------    -----------------
                                       (dollars in thousands)
                               Amount    Percent    Amount    Percent
                               ------    -------    ------    -------


                            <c>       <c>        <c>       <c>
Real Estate
  Residential                  $  518     31.6%     $  553     32.8%
  Commercial                    1,570     41.8%      1,733     42.5%
  Construction                    199      7.0%        199      7.3%
  Home equity loans                34      1.6%         32      1.6%
Other Loans
  Commercial                      514      9.6%        349      7.5%
  Consumer installment            126      2.9%        138      3.3%
  Municipal, Other and
   Unallocated                     61      5.6%         63      5.0%
                               ------    -----      ------    -----
      Total                    $3,022    100.0%     $3,067    100.0%
                               ======    =====      ======    =====
Ratio of Net Charge Offs to
 Average Loans not held
 for sale (1)                             0.03%                0.00%
                                         =====                =====

Ratio of Allowance for Loan
 Losses to Loans not held
 for sale                                 1.10%                1.13%
                                         =====                =====


<FN>
<F1>  Annualized
</FN>
</TABLE>

Management of the Company believes that the allowance for loan losses at
June 30, 2005 is adequate to cover losses inherent in the Company's loan
portfolio as of such date. However there can be no assurance that the
Company will not sustain losses in future periods, which could be greater
than the size of the allowance for loan losses at June 30, 2005. See
CRITICAL ACCOUNTING POLICIES.


<PAGE>  23


While the Company recognizes that any economic slowdown may adversely
impact its borrowers' financial performance and ultimately their ability to
repay their loans, management continues to be cautiously optimistic about
the key credit indicators from the Company's loan portfolio.

Investment Activities. At June 30, 2005, the reported value of investment
securities available-for-sale was $31.7 million or 8.8% of its assets. The
Company had no securities classified as held-to-maturity or trading.
The reported value of investment securities available-for-sale at June 30,
2005, reflects a positive valuation adjustment of $317 thousand. The offset
of this adjustment, net of income tax effect, was $209 thousand in the
Company's other comprehensive income component of stockholders' equity.

The amount in investment securities available-for-sale has decreased from
$41.0 million at December 31, 2004, to $31.7 million at June 30, 2005 as
loan demand has remained strong and securities maturing, called or paying
down have not been replaced. Union also sold $2 million of securities year
to date to clean up small remaining balances on mortgage backed securities.

At December 31, 2004, the Company had only one adjustable rate mortgage
backed security with a fair value of $29 thousand with an unrealized loss
of less than $1 thousand that had existed for more than 12 months. That
security was sold along with the small remaining balances of nine other
mortgage backed securities in May of 2005 for a net gain on the 10
securities of $1 thousand.

At June 30, 2005, twenty-one securities with a fair value of $9.1 million
or 28.7% of the portfolio have been in a loss position for more than twelve
months with unrealized losses totaling $119 thousand. The primary factor
causing these unrealized losses is the change in the interest rate
environment over the past year especially in the near-term market.
Management deems the unrealized losses on all these securities to be
temporary since there are no credit quality issues and the Company has the
ability to hold these securities, classified as available-for-sale, for the
foreseeable future.

Deposits. The following table shows information concerning the Company's
average deposits by account type, and the weighted average nominal rates at
which interest was paid on such deposits for the periods ending June 30, 2005
and December 31, 2004:

<TABLE>
<CAPTION>

                             Six Months Ended June 30,       Year Ended December 31,
                                       2005                             2004
                            --------------------------        -----------------------
                                              (dollars in thousands)
                                       Percent                           Percent
                            Average    Of Total    Average    Average    of Total    Average
                            Amount     Deposits      Rate     Amount     Deposits      Rate
                            -------    --------    -------    -------    --------    -------


                         <c>         <c>         <c>       <c>          <c>        <c>
Non-time deposits:
  Demand deposits           $ 50,050     16.6%                $ 49,638      16.6%
  NOW accounts                47,906     15.9%      0.48%       45,619      15.2%     0.41%
  Money Markets               60,710     20.2%      1.31%       64,668      21.6%     0.87%
  Savings                     49,146     16.3%      0.57%       47,225      15.7%     0.58%
                            --------    -----                 --------     -----
Total non-time deposits:     207,812     69.0%                 207,150      69.1%
                            --------    -----                 --------     -----

Time deposits:
  Less than $100,000          62,788     20.8%      2.07%       65,663      21.9%     2.00%
  $100,000 and over           30,607     10.2%      2.60%       26,993       9.0%     2.28%
                            --------    -----                 --------     -----
Total time deposits           93,395     31.0%                  92,656      30.9%
                            --------    -----                 --------     -----
Total deposits              $301,207    100.0%      1.13%     $299,806     100.0%     0.98%
                            ========    =====       ====      ========     =====      ====
</TABLE>


<PAGE>  24


The following table sets forth information regarding the amounts of the
Company's time deposits in amounts of $100,000 or more at June 30, 2005 and
December 31, 2004 that mature during the periods indicated:

<TABLE>
<CAPTION>

                   June 30, 2005    December 31, 2004
                   -------------    -----------------
                         (dollars in thousands)


                   <c>                <c>
Within 3 months       $15,987            $ 8,149
3 to 6 months           6,536             11,717
6 to 12 months          3,529              6,298
Over 12 months          2,752              3,160
                      -------            -------
                      $28,804            $29,324
                      =======            =======
</TABLE>

Borrowings. Borrowings from the Federal Home Loan Bank of Boston (FHLB)
were $13.8 million at June 30, 2005, at a weighted average rate of 4.54%.
Borrowings from the FHLB of Boston were $7.9 million at December 31, 2004,
at a weighted average rate of 4.09%. The change between year end 2004 and
the end of the second quarter of 2005 is a net increase of $5.9 million
which was comprised of borrowing $7.9 million in long term amortizing
advances to match fund new loans offset by $500 thousand in continuing
paydowns on existing long-term amortizing advances and $1.5 million payoff
of a short-term liquidity advance.

                       OTHER FINANCIAL CONSIDERATIONS

Market Risk and Asset and Liability Management. Market risk is the
potential of loss in a financial instrument arising from adverse changes in
market prices, interest rates, foreign currency exchange rates, commodity
prices and equity prices. The Company's market risk arises primarily from
interest rate risk inherent in its lending, investing and deposit taking
activities as yields on assets change in a different time period or in a
different amount from that of interest costs on liabilities. Many other
factors also affect the Company's exposure to changes in interest rates,
such as general and local economic and financial conditions, competitive
pressures, customer preferences, and historical pricing relationships.

The earnings of the Company and its subsidiary are affected not only by
general economic conditions, but also by the monetary and fiscal policies
of the United States and its agencies, particularly the Federal Reserve
System. The monetary policies of the Federal Reserve System influence to a
significant extent the overall growth of loans, investments and deposits;
the level of interest rates earned on assets and paid for liabilities; and
interest rates charged on loans and paid on deposits. The nature and impact
of future changes in monetary policies are often not predictable.

A key element in the process of managing market risk involves direct
involvement by senior management and oversight by the Board of Directors as
to the level of risk assumed by the Company in its balance sheet. The Board
of Directors reviews and approves risk management policies, including risk
limits and guidelines and reviews quarterly the current position in
relationship to those limits and guidelines. Daily oversight functions are
delegated to the Asset Liability Management Committee ("ALCO"). The ALCO,
consisting of senior business and finance officers, actively measures,
monitors, controls and manages the interest rate risk exposure that can
significantly impact the Company's financial position and operating
results. The Company does not have any market risk sensitive instruments
acquired for trading purposes. The Company attempts to structure its
balance sheet to maximize net interest income and shareholder value while
controlling its exposure to interest rate risk. The ALCO formulates
strategies to manage interest rate risk by evaluating the impact on
earnings and capital of such factors as current interest rate forecasts and
economic indicators, potential changes in such forecasts and indicators,
liquidity, and various business strategies. The ALCO's methods for
evaluating interest rate risk include an analysis of the Company's
interest-rate sensitivity "gap", which provides a static analysis of the
maturity and repricing characteristics of the Company's entire balance
sheet, and a simulation analysis, which calculates projected net interest
income based on alternative balance sheet and interest rate scenarios,
including "rate shock" scenarios involving immediate substantial increases
or decreases in market rates of interest.


<PAGE>  25


The Company's ALCO meets weekly to set loan and deposit rates, make
investment decisions, monitor liquidity and evaluate the loan demand
pipeline. Deposit runoff is monitored daily and loan prepayments evaluated
monthly. The Company historically has maintained a substantial portion of
its loan portfolio on a variable rate basis and plans to continue this
Asset/Liability Management (ALM) strategy in the future. Portions of the
variable rate loan portfolio have interest rate floors and caps which are
taken into account by the Company's ALM modeling software to predict
interest rate sensitivity, including prepayment risk. As of June 30, 2005
the investment portfolio was all classified as available-for-sale and the
modified duration was relatively short. The Company does not utilize any
derivative products or invest in any "high risk" instruments.

The Company's interest rate sensitivity analysis (simulation) as of
December 2004 for a 75 basis point increase in the rate environment in 25
basis point increments (prime at December 31, 2004 was 5.25% and was 6.25%
on June 30, 2005 but the 25 basis point move happened on the thirtieth of
June so there would have been no impact until the July 2005) projected the
following for the six months ended, June 30, 2005 compared to the actual
results of:

<TABLE>
<CAPTION>

                                 June 30, 2005
                       ---------------------------------
                                              Percentage
                       Projected    Actual    Difference
                       ---------    ------    ----------
                             (dollars in thousands)


                    <c>          <c>         <c>
Net Interest Income    $9,034       $8,607      (4.73)%
Net Income             $2,957       $2,828      (4.36)%
Return on Assets         1.68%        1.60%     (4.76)%
Return on Equity        14.19%       13.89%     (2.11)%
</TABLE>

One of the reasons for the actual results being lower than projected is
that the simulation model assumed the 25 basis point increases in prime
would happen on February and March 1st, respectively while they actually
happened on February 2nd, March 22nd, and May 3rd.

Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, interest rate caps and floors written on adjustable rate
loans, commitments to participate in or sell loans and commitments to buy
or sell securities. Such instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of these instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.

The Company generally requires collateral or other security to support
financial instruments with credit risk. As of June 30, 2005 and December
31, 2004, the contract or notional amount of financial instruments whose
contract or notional amount represents credit risk was as follows:

<TABLE>
<CAPTION>

                                                                 June 30, 2005    December 31, 2004
                                                                 -------------    -----------------
                                                                       (dollars in thousands)


                                                                 <c>                <c>
Commitments to originate loans                                      $16,402            $13,773
Unused lines of credit                                               26,701             31,908
Standby letters of credit                                               826              1,004
Credit Card arrangements                                              2,285              2,273
Equity investment commitments to housing limited partnerships           453              1,349
                                                                    -------            -------
      Total                                                         $46,671            $50,307
                                                                    =======            =======
</TABLE>


<PAGE>  26


Commitments to originate loans are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the loan
commitments are expected to expire without being drawn upon and not all
credit lines will be utilized, the total commitment amounts do not
necessarily represent future cash requirements.

The Company's contractual obligations at June 30, 2005 and December 31,
2004 were as follows:

<TABLE>
<CAPTION>

                                                                 June 30, 2005    December 31, 2004
                                                                 -------------    -----------------
                                                                       (dollars in thousands)


                                                                 <c>                <c>
Operating lease commitments                                         $    297           $    329
Maturities on borrowed funds                                          13,803              7,933
Deposits without stated maturity (1)                                 211,365            214,402
Certificates of deposit (1)                                           91,317             92,196
Pension plan contributions (2)                                           402                475
Deferred compensation payouts                                            736                927
Equity investment commitments in housing limited partnerships            748                  -
                                                                    --------           --------
      Total                                                         $318,668           $316,262
                                                                    ========           ========

<FN>
--------------------
<F1>  While the Company has a contractual obligation to depositors should
      they wish to withdraw all or some of the funds on deposit with the
      Bank subsidiary, management believes, based on historical analysis,
      that the majority of these deposits will remain on deposit for the
      foreseeable future. The amounts exclude interest accrued.
<F2>  Funding requirements for pension benefits after 2005 are excluded due
      to the significant variability in the assumptions required to project
      the amount and timing of future cash contributions.
</FN>
</TABLE>

The Company's subsidiary is also required to maintain a noninterest-bearing
reserve balance by the Federal Reserve Bank of Boston. The required reserve
has not materially changed since December 31, 2004.

Interest Rate Sensitivity "Gap" Analysis. An interest rate sensitivity
"gap" is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates,
a negative gap would tend to result in an increase in net interest income,
while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market interest
rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly
matched in each maturity category.

The Company prepares its interest rate sensitivity "gap" analysis by
scheduling interest-earning assets and interest-bearing liabilities into
periods based upon the next date on which such assets and liabilities could
mature or reprice. The amounts of assets and liabilities shown within a
particular period were determined in accordance with the contractual terms
of the assets and liabilities, except that:

*     adjustable-rate loans, investment securities, variable rate time
      deposits, and FHLB advances are included in the period when they are
      first scheduled to adjust and not in the period in which they mature;

*     fixed-rate mortgage-related securities, loans and borrowed funds
      reflect estimated prepayments, which were estimated based on analyses
      of broker estimates, the results of a prepayment model utilized by
      the Company, and empirical data;


<PAGE>  27


*     NOW, money markets, and savings deposits, which do not have
      contractual maturities, reflect estimated levels of attrition, which
      are based on detailed studies by the Company of the sensitivity of
      each such category of deposit to changes in interest rates.

Management believes that these assumptions approximate actual experience
and considers them reasonable. However, the interest rate sensitivity of
the Company's assets and liabilities in the tables could vary substantially
if different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.

The following table shows the Company's rate sensitivity analysis as of
June 30, 2005:

<TABLE>
<CAPTION>

                                                                         June 30, 2005
                                                                   Cumulative repriced within
                                              3 Months    4 to 12     1 to 3      3 to 5       Over
                                              or Less     Months      Years       Years       5 Years       Total
                                              --------    -------     ------      ------      -------       -----
                                                           (dollars in thousands, by repricing date)


                                           <c>         <c>        <c>         <c>         <c>           <c>
Interest sensitive assets:
  Federal funds sold and
   overnight deposits                         $  3,948          -           -           -            -     $  3,948
  Interest bearing deposits in banks               199      2,170       2,862         885           99        6,215
  Investments securities available-for-
   sale (1)                                      2,355      4,845       9,218       7,362        6,692       30,472
  FHLB Stock                                         -          -           -           -        1,241        1,241
  Loans and loans held for sale (2)            116,971     67,705      62,162      30,868       14,477      292,183
                                              --------    -------    --------    --------    ---------     --------
      Total interest sensitive assets         $123,473    $74,720    $ 74,242    $ 39,115    $  22,509     $334,059
                                              ========    =======    ========    ========    =========     ========

Interest sensitive liabilities:
  Time deposits                               $ 32,444    $36,393    $ 20,019    $  2,461    $       -     $ 91,317
  Money markets                                 11,548          -           -           -       46,508       58,056
  Regular savings                               11,146          -           -           -       42,999       54,145
  NOW accounts                                  22,634          -           -           -       30,587       53,221
  Borrowed funds                                   273      2,431       3,701       1,414        5,984       13,803
                                              --------    -------    --------    --------    ---------     --------
      Total interest sensitive liabilities    $ 78,045    $38,824    $ 23,720    $  3,875    $ 126,078      270,542
                                              ========    =======    ========    ========    =========     ========

Net interest rate sensitivity gap             $ 45,428    $35,896    $ 50,522    $ 35,240    $(103,569)    $ 63,517
Cumulative net interest rate
 sensitivity gap                              $ 45,428    $81,324    $131,846    $167,086    $  63,517
Cumulative net interest rate
 sensitivity gap as a
 percentage of total assets                       12.6%      22.5%       36.5%       46.2%        17.6%
Cumulative net interest rate sensitivity
 gap as a percentage of total
 interest-sensitive assets                        13.6%      24.3%       39.5%       50.0%        19.0%
Cumulative net interest rate sensitivity
 gap as a percentage of total
 interest-sensitive liabilities                   16.8%      30.1%       48.7%       61.8%        23.5%

<FN>
<F1>  Investment securities available-for-sale exclude marketable equity
      securities with a fair value of $1.2 million that may be sold by the
      Company at any time.
<F2>  Balances shown net of unearned income of $156 thousand.
</FN>
</TABLE>



<PAGE>  28


Simulation Analysis. In its simulation analysis, the Company uses computer
software to simulate the estimated impact on net interest income and
capital (Net Fair Value) under various interest rate scenarios, balance
sheet trends, and strategies over a relatively short time horizon. These
simulations incorporate assumptions about balance sheet dynamics such as
loan and deposit growth, product pricing, prepayment speeds on mortgage
related assets and principal maturities on other financial instruments, and
changes in funding mix. While such assumptions are inherently uncertain as
actual rate changes rarely follow any given forecast and asset-liability
pricing and other model inputs usually do not remain constant in their
historical relationships, management believes that these assumptions are
reasonable. Based on the results of these simulations, the Company is able
to quantify its estimate of interest rate risk and develop and implement
appropriate strategies.

The following chart reflects the cumulative results of the latest
simulation analysis for the next twelve months on Net Interest Income, Net
Income, Return on Assets, Return on Equity and Net Fair Value Ratio. The
projection utilizes a rate shock of up 300 basis points and down 200 basis
points from the current prime rate of 6.25%, this rise is the highest
internal slope monitored and down 200 basis points was chosen as with the
current relatively low level of interest rates the potential for interest-
bearing deposit accounts to respond to further drops in projected rates is
limited, therefore calculations for rate decreases greater than 200 basis
points could have been misleading. This slope range was determined to be
the most relevant during this economic cycle.

                           UNION BANKSHARES, INC.
                  INTEREST RATE SENSITIVITY ANALYSIS MATRIX
                                JUNE 30, 2005
                               (in thousands)
-----------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          Return    Return
                                                            on        on      Net Fair
12 Months    Prime    Net Interest    Change    Net       Assets    Equity      Value
  Ending     Rate        Income          %      Income       %         %        Ratio
---------    -----    ------------    ------    ------    ------    ------    --------


          <c>         <c>          <c>       <c>       <c>       <c>       <c>
 June-06     9.25%       $21,223       16.82    $7,841    2.20      18.54     17.12
             6.25%        18,166        0.00     5,765    1.54      13.35     17.37
             4.25         16,050      (11.65)    4,328    1.07       9.51     17.22
</TABLE>

The resulting projected cumulative effect of these estimates on Net
Interest Income and the Net Fair Value Ratio for the twelve month period
ending June 30, 2006 are within the approved ALCO guidelines. The
simulations of earnings do not incorporate any management actions, which
might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as
conservative estimates of interest rate risk.

Liquidity. Managing liquidity risk is essential to maintaining both
depositor confidence and stability in earnings. Liquidity is a measurement
of the Company's ability to meet potential cash requirements, including
ongoing commitments to fund deposit withdrawals, repay borrowings, fund
investment and lending activities, and for other general business purposes.
The Company's principal sources of funds are deposits, amortization and
prepayment of loans and securities, maturities of investment securities and
other short-term investments, sales of securities and loans available-for-
sale, earnings and funds provided from operations. Maintaining a relatively
stable funding base, which is achieved by diversifying funding sources,
competitively pricing deposit products, and extending the contractual
maturity of liabilities, reduces the Company's exposure to roll over risk
on deposits and limits reliance on volatile short-term purchased funds.
Short-term funding needs arise from declines in deposits or other funding
sources, funding of loan commitments, unused lines of credit and requests
for new loans. The Company's strategy is to fund assets, to the maximum
extent possible, with core deposits that provide a


<PAGE>  29


sizable source of relatively stable and low-cost funds. For the quarter
ended, June 30, 2005, the Company's ratio of average loans to average
deposits was 94.0% compared to the prior year of 90.6%. The increase in the
loan to deposit ratio between years was mainly funded by the decrease in
Investment Securities available-for-sale and Due From Banks.

In addition, as Union Bank is a member of the FHLB of Boston, it has access
to unused pre-approved lines of credit of $3.8 million or 1.1% of total
assets. Union Bank maintains a $5 million pre-approved Federal Fund line of
credit with an upstream correspondent bank and a repurchase agreement line
with a selected brokerage house, there were no balances outstanding on
either line at June 30, 2005.

While scheduled loan and securities payments and FHLB advances are
relatively predictable sources of funds, deposit flows and prepayments on
loans and mortgage-backed securities are greatly influenced by general
interest rates, economic conditions, and competition. The Company's
liquidity is actively managed on a daily basis, monitored by the ALCO, and
reviewed periodically with the subsidiary's Board of Directors. The
Company's ALCO sets liquidity targets based on the Company's financial
condition and existing and projected economic and market conditions. The
ALCO measures the Company's marketable assets and credit facilities
available to fund liquidity requirements and compares the adequacy of that
aggregate amount against the aggregate amount of the Company's interest
sensitive or volatile liabilities, such as core deposits and time deposits
in excess of $100,000, borrowings and term deposits with short maturities,
and credit commitments outstanding. The primary objective is to manage the
Company's liquidity position and funding sources in order to ensure that it
has the ability to meet its ongoing commitment to its depositors, to fund
loan commitments and unused lines of credit, and to maintain a portfolio of
investment securities.

The Company's management monitors current and projected cash flows and
adjusts positions as necessary to maintain adequate levels of liquidity.
Although approximately 74.7% of the Company's time deposits will mature
within twelve months, management believes, based upon past experience, that
Union Bank will retain a substantial portion of these deposits. Management
will continue to offer a competitive but prudent pricing strategy to
facilitate retention of such deposits. Any reduction in total deposits
could be offset by purchases of federal funds, short-term FHLB of Boston
borrowings, utilization of the repurchase agreement line, or liquidation of
investment securities or loans available-for-sale. Such steps could result
in an increase in the Company's cost of funds and adversely impact the net
interest spread and margin. Management believes the Company has sufficient
liquidity to meet all reasonable borrower, depositor, and creditor needs in
the present economic environment. However, any projections of future cash
needs and flows are subject to substantial uncertainty. We continually
evaluate opportunities to buy/sell securities and loans available-for-sale,
obtain credit facilities from lenders, or restructure our debt for
strategic reasons or to further strengthen our financial position.

Capital Resources. Capital management is designed to maintain an optimum
level of capital in a cost-effective structure that meets target regulatory
ratios; supports the internal assessment of economic capital; funds the
Company's business strategies; and builds long-term stockholder value.

The total dollar value of the Company's stockholders' equity was $41.1
million at June 30, 2005 reflecting net income of $2.8 million for the
first six months of 2005, less dividends paid of $4.0 million, and a
reduction of $168 thousand in Accumulated Other Comprehensive Income
compared to $42.4 million at year end 2004. The reduction in the capital
between December 31, 2004 and June 30, 2005, was primarily a result of the
special dividend of $0.40 per share that was paid in January 2005 totaling
$1.8 million, which was in addition to the regular dividends of $0.24 or
$1.1 million each that were paid in January and April of 2005. The special
dividend was declared as the Company's primary capital ratio on December
31, 2004 approached 12%, 2004 earnings were better than anticipated, and
the current tax treatment of dividends is beneficial to shareholders. Union
Bankshares, Inc. has 5 million shares of $2.00 par value common stock
authorized. As of June 30, 2005, the Company had 4,915,611 shares issued,
of which 4,554,663 were outstanding and 360,948 were held in Treasury.

As of June 30, 2005, there were outstanding employee incentive stock
options with respect to 12,575 shares of the Company's common stock,
granted pursuant to Union Bankshare's 1998 Incentive Stock


<PAGE>  30


Option Plan. All the options outstanding are currently exercisable but
only 6,325 of those shares are "in the money". Of the 75,000 shares
authorized for issuance under the 1998 Plan, 51,950 shares remain available
for future option grants. During the second quarter of 2005, no incentive
stock options granted pursuant to the 1998 plan were exercised.

Union Bankshares, and Union Bank Inc. are subject to various regulatory
capital requirements administered by the federal banking agencies. Management
believes, as of June 30, 2005 that both companies meet all capital adequacy
requirements to which they are subject. As of June 30, 2005, the most recent
calculation categorizes Union Bank as well capitalized under the regulatory
framework for prompt corrective action. The prompt corrective action capital
category framework applies to FDIC insured depository institutions such as
Union but does not apply directly to bank holding companies such as the
Company. To be categorized as well capitalized, Union Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table below. There are no conditions or events since June
30, 2005 that management believes have changed either companies' category.

Union Bank's and the Company's actual capital amounts and ratios as of June
30, 2005 are presented in the table:

<TABLE>
<CAPTION>

                                                                                       Minimums
                                                                                      To Be Well
                                                                  Minimums        Capitalized Under
                                                                For Capital       Prompt Corrective
                                               Actual           Requirements      Action Provisions
                                          ----------------    ----------------    -----------------
                                          Amount     Ratio    Amount     Ratio    Amount      Ratio
                                          ------     -----    ------     -----    ------      -----
                                                           (dollars in thousands)


                                       <c>        <c>      <c>         <c>     <c>         <c>
Total capital to risk weighted assets
  Union Bank                              $43,663    17.6%    $19,847     8.0%    $11,277     10.0%
  Company                                  44,040    17.7%     19,905     8.0%        N/A      N/A
Tier I capital to risk weighted assets
  Union Bank                              $40,468    16.3%    $ 9,931     4.0%    $14,896      6.0%
  Company                                  40,845    16.4%      9,962     4.0%        N/A      N/A
Tier I capital to average assets
  Union Bank                              $40,468    11.4%    $14,199     4.0%    $17,749      5.0%
  Company                                  40,845    11.5%     14,207     4.0%        N/A      N/A
</TABLE>

Regulatory Matters. The Company and its subsidiary bank are subject to
periodic examinations by the various regulatory agencies. These
examinations include, but are not limited to, procedures designed to review
lending practices, risk management, credit quality, liquidity, compliance
and capital adequacy. During 2004, the Vermont State Department of Banking,
the Federal Deposit Insurance Corporation, and the Federal Reserve Bank of
Boston performed various examinations of the Company and Union pursuant to
their regular, periodic regulatory reviews. No comments were received from
these various bodies that would have a material adverse effect on either
Company's liquidity, capital resources, or operations.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Information called for by this item is incorporated by reference in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "OTHER FINANCIAL CONSIDERATIONS" on pages 25
through 31 in this Form 10-Q.


<PAGE>  31


Item 4.  Controls and Procedures.

The Company's chief executive officer and chief financial officer evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange
Act) as of the report date and concluded that those disclosure controls and
procedures are effective in alerting them in a timely manner to material
information about the Company and its consolidated subsidiary required to
be disclosed in the Company's periodic reports filed with the Securities
and Exchange Commission.

There have been no changes in the Company's internal controls or in other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation. While the Company believes that its
existing disclosure controls and procedures have been effective to
accomplish these objectives, the Company intends to continue to examine,
refine and formalize its disclosure controls and procedures and to monitor
ongoing developments in this area.


PART II  OTHER INFORMATION

Item 1.  Legal Proceedings.

There are no known pending legal proceedings to which the Company or its
subsidiary is a party, or to which any of their properties is subject,
other than ordinary litigation arising in the normal course of business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion of management, any
such liability will not have a material effect on the consolidated
financial position of the Company and its subsidiary.

Item 4.  Submission of Matters to a Vote of Security Holders.

The Company held its annual meeting of shareholders on May 18, 2005. Of
4,554,663 shares outstanding on the record date of the meeting (April 1,
2005), 3,818,008 shares were represented in person or by proxy. The only
matter voted on by the shareholders at the meeting was to fix the number of
directors at eight and to elect the following individuals as directors for
the ensuing year. The Board of Directors nominated businessman and former
bank executive Steven J. Bourgeois to fill the vacancy created by the
retirement of William T. Costa, Jr. who had reached the mandatory
retirement age.

<TABLE>
<CAPTION>

                           Votes        Votes       Votes        Broker
Nominees                    For       Withheld    Abstained    Non-votes
                           -----      --------    ---------    ---------


                      <c>           <c>          <c>        <c>
Cynthia D. Borck         3,815,889        600       1,519       -
Steven J. Bourgeois      3,807,739      8,750       1,519       -
Kenneth D. Gibbons       3,807,439      9,050       1,519       -
Franklin G. Hovey, II    3,815,564        925       1,519       -
Richard C. Marron        3,812,889      3,600       1,519       -
Robert P. Rollins        3,813,111      3,378       1,519       -
Richard C. Sargent       3,804,736     11,753       1,519       -
John H. Steel            3,816,489          -       1,519       -
</TABLE>


<PAGE>  32


Item 6.  Exhibits.

      31.1  Certification of the Chief Executive Officer pursuant to
            Section 302 of the Sarbanes-Oxley Act of 2002.
      31.2  Certification of the Chief Financial Officer pursuant to
            Section 302 of the Sarbanes-Oxley Act of 2002.
      32.1  Certification of the Chief Executive Officer pursuant to
            Section 906 of the Sarbanes-Oxley Act of 2002.
      32.2  Certification of the Chief Financial Officer pursuant to
            Section 906 of the Sarbanes-Oxley Act of 2002.

                                 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

August 11, 2005                        Union Bankshares, Inc.

                                       /s/ Kenneth D. Gibbons
                                       ----------------------
                                       Kenneth D. Gibbons
                                       Director, President and Chief
                                       Executive Officer

                                       /s/ Marsha A. Mongeon
                                       ---------------------
                                       Marsha A. Mongeon
                                       Chief Financial Officer and Treasurer
                                       (Principal Financial Officer)


                                EXHIBIT INDEX

31.1  Certification of the Chief Executive Officer pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.
31.2  Certification of the Chief Financial Officer pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.
32.1  Certification of the Chief Executive Officer pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002.
32.2  Certification of the Chief Financial Officer pursuant to Section 906
      of the Sarbanes-Oxley Act of 2002.


<PAGE>  33